The majority of large companies are probably currently preparing for an important innovation: sustainability reporting in accordance with the CSRD. HR and labor law are also affected. This is because the report not only includes information on environmental issues, but also a great deal of information about employees.
The Corporate Sustainability Reporting Directive (CSRD) was adopted in December 2022 and has been in force since 05 January 2023. As a directive, however, it still has to be transposed into national law.
Large capital market-oriented companies must deliver first
As of the 2024 reporting year, large capital market-oriented companies as well as banks and insurance companies with an average of more than 500 employees are required to submit comprehensive reporting on the ESG topics of environment, social and governance with their management report. Large in the sense of the CSRD means that the company fulfills at least two of the three characteristics on the balance sheet date:
- Balance sheet total of at least 20 million euros
- Net sales of at least 40 million euros
- At least 250 employees on average
In the reporting year 2025, this will be followed by limited liability companies, credit institutions and insurance companies that meet at least two of these three characteristics on the balance sheet date:
- Balance sheet total of at least 20 million euros
- Net sales of at least 40 million euros
- At least 250 employees on average
Starting in the 2026 reporting year, listed SMEs, small and non-complex credit institutions, and captive (re)insurance companies will have to report on sustainability.
Even non-EU companies with EU branches or EU subsidiaries are affected if they generate net sales of more than €150 million within the EU. For them, the reporting obligation applies for the first time in 2028.
Micro-entities, which are defined as companies that fulfill at least two of the three characteristics on the balance sheet date, remain exempt from the reporting requirement for listed SMEs:
- Balance sheet total of maximum 340,000 euros
- Net sales maximum 700,000 euros
- maximum 10 employees on average
The purpose of ESRSs is to ensure uniform reporting
Sustainability reporting should be as uniform as possible so that companies can be compared with each other. For this reason, the European Financial Reporting Advisory Group “EFRAG” has drafted standards. A first set of these European Sustainability Reporting Standards (ESRS) was adopted by the EU Commission on July 31, 2023 in the form of a delegated act. This comprises a total of twelve ESRS, including four draft standards on social aspects:
- own workforce
- Employees in the value chain
- affected communities
- Consumers and end users
Subject of the reporting obligations regarding own personnel
Reporting requirements relevant to HR can be found primarily under the heading “own workforce”. This includes the following working conditions:
- secure employment (secure employment),
- Working hours (Working time),
- Reconciliation of professional and private life (work life balance),
- adequate remuneration (adequate wages),
- social dialogue (social dialogue),
- Works council and its co-determination (freedom of association, the existence of works councils and the information, consultation and participation rights of workers),
- freedom of association and the right to collective bargaining (collective bargaining, including rate of workers covered by collective agreements),
- Gesundheit und Sicherheit (health and safety).
Companies only have to report on the issues that are material to them
The current version of the ESRS requires companies to report only on those topics that are material to them. For this purpose, they are to perform a materiality test. This is done in two ways: once from an inside-out perspective (What impact does the company’s activities have on the environment and people?) and once from an outside-in perspective (How does the issue of sustainability affect the company’s financial situation?).
Important topics in any case are diversity and equal pay. This is because an obligation to pay the same for the same job also arises from the German Pay Transparency Act (Entgelttransparenzgesetz). The Management Positions Act (FüPoG) also ensures more equal treatment by stipulating the proportion of women in management positions. An obligation to pay appropriate remuneration that is at least equivalent to the statutory minimum wage applicable in each case also arises from the Supply Chain Sourcing Obligations Act. In this context, the Supply Chain Act also provides for an equal treatment requirement; in particular, no one may be paid less because of their gender.
Data for reporting according to the CSRD should be collected at an early stage
Early data collection is recommended for three reasons. First, not all the data you need may be available at all. It may be that the collection of this data needs to be programmed first. Particularly in the “social” area of ESG, it is usually a matter of personal and therefore particularly sensitive data. The data protection officer should definitely be consulted here.
Secondly, the results of evaluations do not always correspond to what management would like to see. If this is identified early enough, it can still take steps to improve these conditions by the time the report is submitted.
Third, some companies will find that they lack manpower for data collection and compilation. If this is noticed in time, the HR area can still be increased. The EU Commission itself calculates that the reporting requirements on its own workforce alone will lead to administrative expenses averaging 100,000 euros per year.
Tip: Implementing sustainability aspects in compensation
It is already mandatory for listed companies and financial institutions: the compensation structure of board members and increasingly also that of employees must be geared to the sustainable development of society.
Other employers may also find it easier to achieve sustainability goals if they provide financial incentives for employees to do so. Bonuses could, for example, be linked to the achievement of ESG targets such as ensuring occupational health and safety, equal opportunities, or the use of zero-emission vehicles for business trips.
Participation of the works council
The works council will have to be involved in many implementation measures in the “Social” area, especially when it comes to compensation issues. It can make sense to involve him from the very beginning, already in the preparation of the sustainability reporting as well as overall in the area of corporate sustainability.
Conclusion: Reporting is an opportunity for companies
Reporting according to the CSRD can help HR management to uncover potential in the company in terms of sustainability. Because sustainable management is increasingly becoming a competitive advantage. It is advisable to prepare the reporting thoroughly at an early stage so that the focus can be set sensibly and the required data is then available.
